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Hybrid future of advice
Hybrid future of advice

Hybrid future of advice


Anne-Laure Couturier

Anne-Laure Couturier

Senior Strategy Analyst

BNP Paribas Securities Services

View profile

Bringing the best of artificial intelligence and human touch

In Europe today, assets managed by robo-advisors are still relatively small; however, they are poised to grow rapidly, as we currently see in the rest of the world. According to studies, in the US, robo-advisors are predicted to manage USD 2.2 trillion by the end of 2020.  These studies also predict that asset managers with no robo-advisor strategy could lose up to USD 90 billion annually in revenues by 2020 due to a price war with robo-advisors.

The value of robo-advisors is to help investors manage their savings. Robo-advisors use an algorithm based criteria from a short questionnaire which examines the investor's financial situation, goals and time horizon. It then recommends cost-efficient investment solutions, mainly passive index funds or exchange traded funds (ETFs) which have much lower fees than actively managed funds.

But the real advantage that robo-advisors bring to investors is the customer experience, with full on-line subscription (using dematerialized documents), a simple questionnaire-based client profiling, asset allocation delivered by email or chatbot, and entertaining videos and graphics with understandable vocabulary.

Early adopters

In the US, both Aberdeen and BlackRock are great examples of asset managers that did not just play the waiting game, but instead formed a strategy early and are now taking a key role in the rise of robo-advice. They have been catching up on a trend set by Betterment, which founded the robo movement in 2010, followed closely by US robo-advisors Wealthfront and Personal Capital, and then followed by larger players including Vanguard, Charles Schwab and Fidelity. European asset managers are now expected to follow BlackRock into the business-to-business robo-advice market as they seek to strengthen their relationships with distributors.

At the same time, wealth managers are realizing that they also need robo-advice to standardize and modernize practices, while wanting to keep the face-to-face element in some form - especially for high-end clients. As a result, wealth managers are launching their own hybrid human-digital robo-advisor with the idea of combining automatized digital platforms, with the necessary human advice. In addition, in order to bring their own client value proposition, wealth managers are starting to rely less heavily on ETFs and becoming more diversified in terms of products. For example, the wealth manager UBS has launched a new robo-advice service that gives customers the choice of either an active or passive approach.

Reaching millennials

In Europe, robo-advisor clients are early adopters - curious people looking for new investment opportunities. Not surprisingly, the characteristics of robo-advice match the expectations of tech-savvy millennials. However, millennials are not yet big consumers of robo-advice. Currently, the majority of robo-advice clients are aged between 35 and 55 (investors with increasing revenues such as HENRYs High Earning, Not Rich Yet). Many robo-advisors are putting forward innovative and interesting ideas and trying to make the customer’s journey more appealing, as a way to attract younger clients.

Some of the innovations and new technologies being explored today provide an insight into how robo-advisors will evolve and appeal to higher-end clients as well as younger and less-affluent individuals. Importantly, artificial intelligence leveraging account aggregation is the most powerful development of this new generation of robo-advisors.

Artificial intelligence will increase client knowledge thanks to the optimization and combination of analysis of data about the macro-economic environment and investor data (age, investment history, psychology). Such analysis enables platforms to offer investors more personalized advice and also to forecast their behaviour. For this purpose, various new mechanisms are deployed, such as gamification and account aggregation.

Gamification improves the quality of client profiling, and thus the quality of the advice. The US company Capital Preferences has developed the future of preference analytics. Their platform uses a series of simple games to discover an investor's "revealed preferences" in terms of their attitude toward risk, loss, time and social decisions. These games provide insight into clients’ financial risk preferences, improving the quality of advice, reducing compliance risk, and allowing powerful marketing segmentation.

Account aggregation capability improves both the user experience and the company’s ability to provide personalized and holistic advice. In the US, this trend is accelerating. The US robo-advisor Wealthfront, with the aim of becoming an all-in-one financial hub powered by artificial intelligence, is a good example of this new trend. Wealthfront is integrating with other platforms such as payments app Venmo, real-estate platform Redfin, and peer-to-peer lending startup Lending Club. These integrations help Wealthfront provide personalised financial recommendations by using artificial intelligence to analyse individual transactions on these different platforms.

Welcome to a new world

With artificial intelligence and account aggregation, we are entering a new phase where robo-advisors are able to provide a holistic overview of multiple accounts and portfolios, composed of very different asset classes and held at multiple financial institutions. The technology will also become smarter in the future by tracking behavioural patterns and using more facets of a client’s life, such as their social media presence, to gather information and offer more custom-made advice. Robo-advisors will be able to make more accurate decisions in complicated situations by proactively learning appropriate responses based on the past and on their enhanced abilities to “learn on the run”.

Such evolution will allow asset and wealth managers to better meet the needs of a cross-generational customer base, who may want the efficiency of advanced technology in combination with customized and high-touch approach of financial advisors.

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